October 2011

Know Your ABCs … It‘s Still Relevant

There aren‘t too many things I remember from my early childhood years, but I do recall my mother teaching me the alphabet, and learning to count to 100, as though these were prerequisites for entering kindergarten.

For those of us engaged in the financial world of insurance, knowing our alphabet is still relevant. With acronyms such as GFC, G-20, FSB, EIOPA, IAIS, FSOC, CEA and a host of others, it‘s important to know what these letters stand for, the scope of work these organizations are involved with, and the influence/change they can bring to our daily work.

This brief article is not focused on identifying every relevant organization in the financial world and its acronym, but to raise your level of awareness and your familiarity with a few of the more common acronyms, their scope of work, and how insurance regulators are engaged.

• Global Financial Crisis (GFC)

Let‘s begin with the global financial crisis (GFC). The greatest financial crisis since the Great Depression of the 1930s now has its own acronym. The proliferation of complex and non-transparent financial instruments involving massive leverage, combined with lack of transparency and inadequate risk management, led to a systemic financial crisis due to the interconnectedness of financial institutions. Questions on the solvency of financial institutions and the financial system‘s ability to absorb another shock of equal magnitude have motivated policymakers and financial regulators, including insurance supervisors, to understand how risk spreads in an interconnected world, identify the reasons for the systemic breakdown that occurred, and evaluate policy changes to mitigate risk and promote stability. 

Key to the policy responses to the GFC in the U.S. was the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), which brought sweeping changes to the financial markets. The bill expanded the role of the federal government in overseeing capital markets, enhancing the role of existing agencies, and creating new agencies and offices to strengthen and streamline regulation and increase oversight of systemically important financial institutions. Among those new federal organizations are FSOC (Financial Stability Oversight Council), OFR (Office of Financial Research), FIO (Federal Insurance Office) and CFPB (Consumer Financial Protection Bureau).

On the international level, policy responses to the GFC include the creation of the FSB (Financial Stability Board) and the new Basel III capital, leverage and liquidity standards for banking institutions.

• International Association of Insurance Supervisors (IAIS)

The International Association of Insurance Supervisors (IAIS) is the United Nations of insurance regulation. The International organization brings together the world's insurance supervisors and regulators from roughly 190 jurisdictions in nearly 140 countries, constituting 97% of the world's insurance premiums. The IAIS U.S. members are the NAIC, the insurance supervisors of all 56 NAIC member jurisdictions as well as the Federal Insurance Office (FIO)[1]Established in 1994, the IAIS is located in Basel, Switzerland to leverage the support of the Bank for International Settlements (BIS), which hosts the IAIS Secretariat. IAIS‘ objective is to promote effective and globally consistent supervision of the insurance industry and to foster financial stability. The IAIS, along with the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), sponsor the Joint forum, a cross-sectoral organization of banking, insurance, and securities supervisors. 

IAIS is engaged in creating international standards of insurance supervision, promoting standards implementation in member jurisdictions, and forging dialogue between insurance regulators and regulators in other financial services sectors. The IAIS holds an annual conference where supervisors, industry representatives and other professionals discuss developments in the insurance sector and topics affecting insurance regulation. A number of state insurance regulators and NAIC staff members participate actively in key IAIS committees.

Central to the IAIS is the organization‘s Insurance Core Principals (ICPs). ICPs are key insurance supervisory and regulatory standards. They provide a globally accepted framework for the regulation and supervision of the insurance sector and serve as a basic benchmark for insurance supervisors in all jurisdictions. ICPs can be used for identifying areas in existing regimes that need to be improved. They are utilized within the International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP), providing a comprehensive and in-depth analysis of a country's financial regulatory sector. This October, the IAIS adopted 26 revised core principles, creating a new set of expectations for insurance supervisory systems.

In August 2009, the NAIC conducted a self-assessment using the existing 28 ICPs and participated in the FSAP process, which reviewed the U.S. insurance regulatory system. The NAIC received high marks from the FSAP‘s Detailed Assessment Report. In the report, the U.S. received a rating of Observed or Largely Observed for 25 out of the 28 core principles. The report acknowledged the important role that the national state-based system of insurance regulation played in providing strength and stability during the financial crisis, noting that "strong regulation contributed to the overall resilience of the insurance sector."

The IAIS continues to refine its work in a number of areas of insurance supervision highlighted by the recent financial crisis. One of these initiatives is the development of a common framework (ComFrame) for group-wide supervision of operating internationally active insurance groups (IAIGs). Through ComFrame, the IAIS aims to develop methods for supervising insurers that do business in two or more countries; establish a comprehensive framework for supervisors to address group-wide activities and risks and also set grounds for better supervisory cooperation; and foster global convergence of regulatory and supervisory measures and approaches.

• The Bank of International Settlements (BIS)

The Bank of International Settlements (BIS) is, simply put, the bankers‘ bankers‘ bank. It is a bank for central banks. Established in 1930, the BIS is the world's oldest international financial organization. It currently has 56 member central banks from which the BIS‘ shareholders and board of directors are drawn.

One of the key objectives of the BIS is to promote monetary and financial stability through international and inter-agency cooperation. The bank‘s Basel-based committees support its members and other public agencies, including insurance regulatory bodies, by providing research and analysis as well as policy recommendations. The BIS, along with the Financial Stability Board and international supervisory bodies, has been charged by the Group of Twenty (G-20) Finance Ministers and Central Bank Governors with developing a system-wide macro-prudential policy framework that includes tools to mitigate systemic risks, which threaten the safety and soundness of the financial system as a whole. 

Committee on the Global Financial System (CGFS)

The Committee on the Global Financial System (CGFS), formerly known as the Euro-currency Standing Committee, was established in 1971 with a mandate to monitor international banking markets. Its original focus was to monitor off-shore financing and study its implications for monetary policy. The Committee‘s attention has shifted to issues of financial market stability and the challenges faced by the global financial system. The committee tries to identify and assess potential sources of stress in the global financial environment through a regular and systematic monitoring of developments in financial markets and systems, including through an evaluation of macroeconomic developments at the national and international levels.

The CGFS works in close cooperation with other national, supranational and international institutions with responsibilities for pursuing related objectives as it examines alternative policy responses to the current financial crisis. The International Association of Insurance Supervisors (IAIS) has worked with the Committee on the disclosure of risks by financial institutions in order to enhance market discipline. Also, at the request of the Financial Stability Forum, the IAIS has partnered with the CGFS on the issues of financial stability and the possible implications of credit risk transfer between the insurance and banking sectors. 

Group of Twenty (G-20)

The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 as a response to the financial crises in Asia and Latin America that threatened the stability of the world economy. It grew out of a similar initiative, the G-7 (group of the seven leading developed countries), which was formed in 1975 following the oil crisis. As economic and political power began shifting from the West to the bigger developing nations, the more-balanced G-20 was formed to include these emerging powers whose economies could significantly impact global stability.

The G-20 is currently the premier forum for debating key economic issues and considering policy options that promote growth and enhance stability. It is an integral player in the process of building a more efficient and resilient international financial architecture. As the scope of financial regulation has been broadened in response to the global financial crisis, the G-20, in close cooperation with multilateral organizations like the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD), supports efforts to strengthen macro-prudential regulation and supervision to mitigate the spread of risk.

The NAIC, representing the views and concerns of the U.S. insurance regulatory community, works closely with the G-20 in various international forums and bodies on such issues as the supervision of internationally active insurance groups (IAIGs), systemically important financial institutions (SIFI) and systemic risk. Furthermore, in the interest of global cooperation and alignment, the G-20 is promoting the convergence of U.S. and international accounting standards. This effort directly involves the NAIC, as such a convergence directly impacts its current financial reporting and accounting environment.

Financial Stability Board (FSB)

In response to the global financial crisis, the Group of Twenty (G-20) Finance Ministers and Central Bank Governors created the Financial Stability Board (FSB) in 2009 as a successor to the Financial Stability Forum (FSF). The FSF, founded in 1999 by the G-7 finance ministers and central bank governors, was re-established as the Financial Stability Board with an expanded membership and broader mandate to address vulnerabilities affecting the global financial system, and to develop and promote the implementation of effective supervisory and regulatory policies promoting financial stability. The FSB membership now includes, in addition to prior FSF members, all G-20 economies and the European Commission.

The FSB steering committee is a board of 25 people, primarily made up of central bankers and national banking/financial services regulators. The U.S. is represented by the Federal Reserve Board, the U.S. Department of Treasury and the Securities and Exchange Commission (SEC). There is only one insurance representative body on the FSB steering committee—the International Association of Insurance Supervisors (IAIS).

The FSB is tasked with providing recommendations and exploring how to treat systemically important financial institutions (SIFIs) so as to prevent another financial crisis. SIFIs are financial institutions whose disorderly failure—because of their size, complexity and systemic interconnectedness—would cause significant disruption to the wider financial system and economic activity.

So far, the FSB has focused on systemically important banks, as they were at the center of the financial crisis. Bank supervisors have developed draft methods for identifying these banks; however, the focus is now shifting to other financial institutions, including insurers. Recognizing that the roles of banks and insurers in the economy differ significantly, the FSB is consulting with the IAIS on developing methods for identifying systemically important insurers. NAIC and state insurance regulators are active members of the IAIS Financial Stability Committee, which provides direct input to the FSB.

Financial Stability Oversight Council (FSOC)

The Financial Stability Oversight Council (FSOC) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) in 2010 to identify emerging threats to U.S. financial stability from the ongoing activities, material distress or failure of large interconnected financial companies, including insurance companies. FSOC can designate an insurance company or insurance holding company to be “systemically significant” if it believes the company’s activities or failure could threaten U.S. financial stability.

The DFA gives the FSOC the authority to require that a non-bank financial company deemed systemically significant be supervised by the Board of Governors of the Federal Reserve and be subject to heightened prudential standards (Section 113). Insurance companies or groups determined to be systemically significant may be subject to enhanced requirements for risk-based capital, leverage, liquidity and credit exposures.

Identifying systemically significant non-banks requires a two-thirds vote (including Treasury Secretary) of the FSOC’s 10 voting members. FSOC has one voting member with insurance expertise, plus two non-voting members representing state insurance regulators and the newly created Federal Insurance Office. The FSOC must consult the company’s primary financial regulator (such as a state insurance commissioner) when making such a determination.

International Accounting Standards Board (IASB)

The International Accounting Standards Board (IASB) is an independent, privately funded accounting standard-setter based in England. The IASB was founded in 2001 as the successor organization to the International Accounting Standards Committee (IASC). It is responsible for developing International Financial Reporting Standards (IFRS) and promoting the global use and application of these standards. 

In pursuit of this goal and with the explicit support of the G-20, the IASB closely cooperates with national accounting standard-setters and regulators to adopt or converge with IFRS in the near future. The IASB and the U.S. Financial Accounting Standards Board (FASB) have been working together since 2002 to achieve convergence of IFRS and U.S. generally accepted accounting principles (GAAP). A common set of high-quality global standards remains a priority of both the IASB and the FASB.

Since NAIC‘s SAP (statutory accounting principles) structure utilizes the framework established by GAAP, any changes as a result of the convergence of accounting standards would directly impact the U.S. insurance regulatory function.

Basel Committee on Banking Supervision (BCBS)

The Basel Committee on Banking Supervision (BCBS) was established in 1974 to formulate broad supervisory standards and guidelines and to encourage convergence towards global banking supervisory approaches and standards. The membership of BCBS is composed of central banks and banking supervising authorities of 27 developed and developing countries with the U.S. represented by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. The Committee reports to the central bank Governors and Heads of Supervision of its member countries and offers advice on banking matters to supervisory authorities in all jurisdictions. As a member of the Joint Forum of international financial regulators, the BCBS, alongside the International Association of Insurance Supervisors (IAIS) and International Organization of Securities Commissions (IOSCO), develops guidance, principles and identifies best practices that are of common interest to all three supervisory standard setters.

The BCBS is noted for its work on international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision. Following the global financial crisis, the BCBS undertook an effort to address some of the weaknesses of the Basel II regulatory framework. A new set of standards incorporating countercyclical measures has been developed to address both firm-specific and macro-prudential system-wide risks.  Collectively, these new standards are referred to as Basel III.

The International Organization of Securities Commissions (IOSCO)

The International Organization of Securities Commissions (IOSCO) was founded in 1983 as an association of organizations that regulate the world‘s securities and futures markets. IOSCO has members from more than 100 different countries that regulate more than 90 percent of the world's securities markets. From the U.S., the Securities and Exchange Commission (SEC) is a voting member of IOSCO, while the Commodity Futures Trading Commission (CFTC) and the North American Securities Administrators Association (NASAA) are non-voting members. The organization‘s role is to assist its members in promoting high standards of regulation and to act as a forum for national regulators to cooperate with each other and other international organizations.

IOSCO participates in the Joint Forum of international financial regulators together with the Basel Committee on Banking Supervision (BCBS) and the International Association of Insurance Supervisors (IAIS) to look at issues common to the banking, securities and insurance sectors, including the regulation of financial conglomerates.

European Insurance and Occupational Pensions Authority (EIOPA)

On January 1, 2010, the European Union (EU) replaced the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) with a new European Insurance and Occupational Pension Authority (EIOPA) as part of broader revamping of financial services regulation. The newly created EIOPA forms part of the European System of Financial Supervision and is one of three new European supervisory authorities along with the European Securities and Markets Authority (ESMA) in the securities sector and the European Banking Authority (EBA) in the banking sector.

The EIOPA is expected to lead to closer integration of European insurance supervision by linking national regulators within a strong EU network. Its core responsibilities are to support the stability of the financial system and transparency of markets and financial products, as well as to protect insurance policyholders, pension scheme members and beneficiaries.

The EIOPA, along with the European Commission and local regulators, is developing Solvency II, a risk-based regulatory framework for the region‘s insurers. Solvency II is a rigorous set of Europe-wide rules for insurers and reinsurers regarding the management of capital, risk and reporting needs. The new regime replaces 14 existing EU insurance directives (Solvency I) with a single directive, aimed at achieving a high degree of regulatory convergence across Europe. Solvency II is scheduled to be implemented on January 1, 2013; however, certain requirements will likely be implemented in stages as spelled out by Ominbus II, the directive proposed by the European Commission.

EU and U.S. regulators regularly engage in transatlantic regulatory dialogue. In March and September 2011, insurance representatives from the NAIC, EIOPA and the European Commission met in Washington D.C., and Frankfurt, Germany, respectively, to discuss challenges with international insurance regulation. Topics discussed included the U.S. Solvency Modernization Initiative (SMI), EU‘s Solvency II reforms, group supervision, implementation of the Dodd-Frank Act, systemic risk and financial stability.

European Insurance and Reinsurance Federation (CEA)

Founded in 1953, the CEA (Comité Européen des Assurances) is the European insurance and reinsurance federation. The Brussels-based federation represents the views of more than 5,000 insurance and reinsurance companies. The CEA groups national member associations of 33 European countries—the 27 European Union member states as well as six non-EU countries (Croatia, Iceland, Liechtenstein, Norway, Switzerland and Turkey). It also has two observer members, Russia and Ukraine.

The CEA represents the views of European insurers in all areas of change, with a focus on the regulatory framework. The implementation, as well as the complexities of, the new Solvency II regime is a top priority for the CEA. As many European insurers prepare for Solvency II, the CEA has communicated industry concerns to EIOPA, the European Commission and other important industry bodies. In addition, the CEA is working with member associations to ensure that the principles of the Solvency II Framework Directive enhance the resilience of EU insurance companies.

In Closing

As you can plainly see—my mother was right. Knowing the ABCs of the financial services world is important. Hopefully this article provides you a primer to help make some sense of the jargon and acronyms used in our puzzling world of high finance and regulation.

[1] As of September 1, 2011.


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